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Personal Finance: Another Perspective


Personal Finance: Another Perspective Retirement Planning 5: Questions and Answers * – PowerPoint PPT presentation

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Title: Personal Finance: Another Perspective

Personal Finance Another Perspective
  • Retirement Planning 5
  • Questions and Answers

  • 1. What are some strategies for the Accumulation
    stage of retirement?
  • 2. What are some strategies for the Retirement
    stage of retirement?
  • 3. What are some strategies for the Distribution
    stage of retirement?
  • 4. How do I determine the taxable / retirement
    split from the hourglass?
  • 5. Why do I have to look at all the details with
    mutual funds. Cant I just use the Morningstar
    Star rating to pick my mutual funds?

Questions (continued)
  • 6. What are the tax implications of the different
    between the Roth and the traditional
  • 7. Should I have and use both traditional and
    Roth retirement vehicles in my retirement plan?
  • 8. What is the most important thing I can do now
    to prepare for retirement?

1. Strategies for Accumulation
  • What are some examples of possible strategies for
    the Accumulation stage of retirement?
  • 1. Live on a budget and save 20 of everything
    you make after school
  • Of that 20, put half or 10 into retirement
    vehicles for your retirement
  • 2. Follow the priority of money (for saving and
  • Get free money first, then tax advantaged money
    (tax eliminated and tax deferred), and then
    tax-efficient and wise investing

Accumulation (continued)
  • 3. Depending on your tax and investing views,
    maximize the amount of money in Roth vehicles
    versus traditional retirement vehicles
  • Put as much new money as possible into Roth
  • With sufficient money saved in Roth vehicles, you
    can plan for and minimize your taxes during

2. Strategies for Retirement
  • What are some examples of possible retirement
    strategies for the Retirement/annuitization
    stage of retirement?
  • 1. Determine your minimum acceptable level of
    retirement income (your survival amount)
  • Try to get that part of your monthly expenses
    annuitized, i.e., paid to you each month for life
  • The process is
  • a. Determine how much money you will have with
    Social Security each month
  • b. Determine any funding you will have from
    defined benefit plans each month

Retirement (continued)
  • c. Determine the difference between these
    amounts and your minimum acceptable level of
    retirement income, and obtain an immediate
    annuity at retirement that would give you that
  • That way you will have your minimum amount for
    living expenses covered for the rest of your life
  • Then, depending on the size of your retirement
    assets and your risk levels, you can annuitize
    more if you have a lower risk tolerance, or
    annuitize less, if you have a higher risk

Retirement (continued)
  • 2. With your spouse, determine how to take your
    distributions from your retirement accounts
  • Work first to annuitize sufficient to give you
    your minimum survival level discussed earlier
  • Make sure you use wisdom and judgment in your
  • Invest the remainder consistent with your risk

3. Strategies for Distribution
  • What are some examples of possible Decumulation
    / Distribution strategies for the decumulation
    stage of retirement?
  • 1. Use money from your deferred retirement
    accounts first, until you get to a target level
    for taxes to be paid
  • Additional money beyond your target level of
    taxes can be taken out of your Roth (tax
    eliminated) vehicles tax free. Use them wisely
  • 2. If you are required to take minimum
    distributions from your tax-deferred accounts and
    you dont need the money, you can roll those
    distributions into another qualified plan, i.e.,
    another Rollover IRA without taxes or into a Roth

Distribution (continued)
  • 3. Watch the percentage of your total portfolio
    that you take out each year, i.e., your
    distribution percentage.
  • If you take out a maximum distribution of
    3.5-3.9 of your portfolio each year (or less),
    your money is more likely to last your lifetime
  • 4. Use the time on your missions to transfer
    money from your tax-deferred accounts to Roth
  • If you are under the income limits, you can
    transfer funds to a Roth at a low level of taxes

Distribution (continued)
  • 5. While it is important to help your kids who
    are having financial problems, realize that your
    first priority is to take care of you and your
    spouse and to make sure you have the financial
    resources to do that adequately first during
  • Make sure you plan to cover your medical costs
    and expenses and the impact of inflation
  • Once you are set up well financially, then worry
    about your childrens finances
  • They are responsible for their own finances
  • Parents who continually help their adult children
    financially will find their adult children always
    need help

4. How do I Determine the Taxable / Retirement
  • The split between taxable and retirement assets
    is determined by
  • a. Your personal goals, and
  • b. Your available retirement vehicles
  • Personal goals might be save 20, and half or
    10 goes into retirement vehicles build your
    emergency fund save for childrens education and
    missions, etc.
  • The goal would determine the category
    retirement (retirement), missions (taxable),
    education (retirement), down payment (taxable),
  • Note that education funds are similar to
    retirement in that you cannot take out the funds
    without a penalty

Taxable / Retirement Split?
  • Available retirement vehicles are based on what
    you are able to invest in. This is determined by
    whether you have a qualified retirement plan
    (QRP) currently at work and whether your current
    income is within IRA deductibility limits.
  • With a QRP and within 2012 IRA limits You can
    put up to 17,000 per year into a QRP
    (401k/403b/457 Plan) and up to 5,000 into an
  • Your spouse can also contribute up to 5,000 into
    an IRA account
  • With QRP and outside IRA limits You can
    contribute up to 17,000 to the QRP
  • You nor your spouse can contribute to an IRA

5. Why do I have to pick funds? Cant I just
use the Morningstar star rankings?
  • Some investors use Morningstar and other
    newsletters to do their homework for them.
    Shouldnt that be enough?
  • Morningstar ratings are backward looking, i.e.,
    they use historical data
  • Research has shown that the rankings have no
    predictive value for future performance
  • Funds with 4 and 5-star ratings typically have
    the highest inflows of assets. With more assets,
    it is harder to put all this new money to work

Morningstar Star Ratings
  • 10 Year Results of Morningstar Ratings
  • Data
  • Of 248 stock funds rated 5-star in 1999, only 4
    kept that rank after 10 years (1.7)
  • Of the 218 domestic stock funds rated 5-star in
    1999, all typically lagged behind their category
    averages and benchmarks over the period
  • Results
  • 5-star funds typically do not continue to lead
    their peersthey typically do worse
  • Use this ranking at your peril

Morningstar Star Ratings
  • We know the principles of successful investing
  • Invest low cost, tax efficiently, be diversified,
    know what you invest in and who you invest with,
    invest long-term, etc,
  • Ratings should be one tool of this analysisbut
    only one tool
  • If you will follow the principles taught in this
    class, you will do a lot better than those who
    blindly follow Morningstar or other star rankings
  • See Sam Hamudi, Investors have Stars in their
    Eyes, Wall Street Journal, June 1, 2010, p. C7.

6. What are the tax implications between the
Roth and traditional vehicles?
  • The tax implications are
  • With the Roth you pay taxes upfront and outside
    of the retirement vehicle
  • You get no tax deduction now for assets to be put
    aside or saved for retirement
  • The benefit is you will have to pay no future
    taxes on assets in these vehicles
  • This includes no taxes on earnings, capital
    gains, interest or dividends
  • Now, regardless of earnings type, you will pay no
    taxes on these assets. Therefore, put your
    highest tax assets in these vehicles
  • Requires no minimum distribution

Tax Implications of Roths (continued)
  • With the traditional 401k/IRA/403b, you get an
    exclusion from total income now
  • This reduces your total income so you pay no
    taxes on the amounts in qualified plans
  • However, when you take the assets out at age 59½
    for retirement, they are
  • Taxed as ordinary income
  • This in essence converts long-term capital gains
    (which they likely were) into ordinary income,
    which is taxed at the highest rate
  • Requires minimum distributions after age 70½

7. Should I have both tax eliminated and tax
deferred assets in my retirement plan?
  • Is there logic for having both traditional and
    Roth retirement vehicles in your Plan?
  • Yes. The US tax system is progressive. As you
    tax out more assets from your tax-deferred
    retirement vehicles you are taxed at a higher
  • However, for the first 17,400 in 2012 you are
    taxed at only 10, and only 15 between 17,400
    and 70,700
  • By having both traditional and Roth vehicles you
    can manage your tax rates to a target percentage
    first, i.e., 10. Then any additional funds can
    be taken from your Roth vehicles to ensure a low
    effective tax rate

8. What is the Most Important Thing I can do Now
to Prepare for Retirement?
  • What is the most important thing I can do now?
  • Realize that you cannot spend your way to a
    successful retirement. It is critical that you
    begin saving now! Assume a 2 million goal at
    8. To save for this goal for the following
    years you would need to put the following amounts
    away each month
  • Years Till Retire Amount Years Amount
  • 40 Years 573 35 Years 872
  • 30 Years 1,342 25 Years 2,103
  • 20 Years 3,395 15 Years 5,708
  • 10 Years 10,932 5 Years 27,219
  • 1 Year 160,644

Most Important Thing to Do Begin Now
  • The key is to make it a priority and to start now!